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BUSINESS START-UP 101 November 16, 2014. +1 (604) 273-8481 | | INTRODUCTION ERIC SCHROTER PARTNER BRANDON.

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Presentation on theme: "BUSINESS START-UP 101 November 16, 2014. +1 (604) 273-8481 | | INTRODUCTION ERIC SCHROTER PARTNER BRANDON."— Presentation transcript:

1 BUSINESS START-UP 101 November 16, 2014

2 +1 (604) | | INTRODUCTION ERIC SCHROTER PARTNER BRANDON HASTINGS ARTICLED STUDENT

3 +1 (604) | | BIO Business Corporations Tax Structures Reorganizations Succession Planning Shareholders Agreements Real Estate Wills Trusts Estate Planning Probate and Estate Administration

4 +1 (604) | | KEY CONSIDERATIONS

5 Sole Proprietorship Partnership Corporation BASIC BUSINESS STRUCTURES

6 +1 (604) | | Sole Proprietorship Pros Simple Write-off losses Low setup cost Cons Unlimited liability Less sophisticated Higher tax rate Individual Business

7 +1 (604) | | Partnership Pros Simple Flow-through of revenue Cons All partners personally liable More difficult financing Fewer individual planning options Written partnership agreement advisable – but rarely done Individual Partnership Individual Business

8 +1 (604) | | Corporation Pros Limited liability Universally recognized Continuing existence Tax advantages Articles govern shareholder relationships Flexible Cons Losses trapped Legal and accounting costs Individual Opco (Operating Company)

9 +1 (604) | | Sole Proprietor PartnershipCorporation Liability Unlimited Limited Setup Cost LowLow-MedHigh Ongoing Cost Low Med Losses Write-off Hold Tax Rate Higher Lower Financing Ease EasierDifficultEasy

10 Holding Companies Trusts SOPHISTICATED BUSINESS STRUCTURES

11 +1 (604) | | Holding Companies 100% Individual 100% Holdco (Holding Company) Opco

12 +1 (604) | | Holdco Advantages Creditor-proof OpcoSeparate Opcos for Projects 100% Holdco Opco Tangible Assets IP Cash Work in Progress Accounts Receivable Holdco Opco

13 +1 (604) | | Shareholder Planning with Companies 1/3 Holdco 2 Opco Holdco 3 Holdco 1 Individual

14 +1 (604) | | Family Trust Not a legal entity Contractual arrangement b/w Settlor and Trustee Trustee holds property on behalf of beneficiaries in accordance with trust agreement Settlor (Gifts Initial Property) Trust Trustee (Administers Trust) Beneficiaries Property

15 +1 (604) | | Trust Mechanisms Trust may hold shares in opcoTrust may hold shares in holdco Opco Holdco Opco 100% Trust Trustee Beneficiaries Trust Trustee Beneficiaries 100%

16 +1 (604) | | Trust may hold shares in Opco and Investco Opco Trust Trustee Investco Family Members 100% Beneficiaries 100%

17 +1 (604) | | Summary: Advantages of Trusts

18 PERSONAL SERVICE BUSINESSES

19 +1 (604) | | What is a “Personal Service Business”? Corporation This or a “related” person provides services and it is “reasonable to regard” the person as an “employee” of the third party if you ignore the corporation Specified Shareholder Contract for Services 3 rd party purchaser (not “associated” with the Corp.) A “specified shareholder” is defined in subsection 248(1) of the Income Tax Act, RSC 1985, c 1, to mean ownership, directly or indirectly, of 10% or more of any class of the issued shares of the corporation

20 +1 (604) | | Personal Services Businesses a corporation in the service business, where the “specified shareholder” or a “related” individual performs the services, and (the “But-For Test”) if you were to ignore the corporation, the “specified shareholder” or “related” individual would seem like an employee Corporation 5+ Employees EXCEPT :

21 +1 (604) | | Drawbacks of a “Personal Service Business” Categories of expenses constrained Tax Rate = 39%, instead of low corporate rate May defer only 6.8% of tax, but will pay 11.2% penalty on distribution to shareholder

22 +1 (604) | | Four-in-one Test

23 TAX PLANNING TECHNIQUES

24 +1 (604) | | Small Business Deduction Deduction Application Applies to Canadian- Controlled Private Corporations (CCPC) – Claim on Canada-source Active Business Income (ABI) Tax rate on CCPC’s ABI – 11% federal – 13.5% combined with BC – Limited to $500,000 – Share $500,000 limit with associated companies Active Business Income Any business, adventure, or concern in the nature of trade, excluding income from businesses that: 1.Have fewer than 6 full-time employees, and 2.Derive income from: 1.Property (including interest, dividends, royalties, and rent – i.e. a “specified investment business”, or 2.Is a Personal Service Business (as discussed)

25 +1 (604) | | Dividend Sprinkling Multiple classes of non-voting common shares Thin Shares – Redeemable by corporation at nominal value Kiddie tax prevents income splitting with family members under 18 years of age Family trust offers most flexibility

26 +1 (604) | | Capital Gains Exemption Shares of Qualified Small Business Corporations (QSBCs) qualify for the exemption QSBCs are: – CCPCs which use 90% of their assets in an Active Business in Canada Conditions to be met up to 2 years before sale: – Remove/transfer non-Active Business assets – Access to $800,000 capital gains tax exemption – Capital gains exemption to increase with cost-of-living

27 +1 (604) | | Capital Gains Exemption Example Shares initially issued for $1.00/share Sale of Shares for $2.5M $2.4M ($800,000 x 3) exempt Shareholder Opco Shareholder

28 +1 (604) | | Closing Remarks Plan in stages to reduce cost Seek professional advice

29 THANK YOU QUESTIONS WELCOME +1 (604) | Eric Schroter, Partner | Dolly Loong, Legal Assistant


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